About endowment mortgages

There are two ways of repaying your mortgage: the repayment mortgage and the interest-only mortgage.

Repayment mortgages

A repayment mortgage is when both interest on the loan and the original amount borrowed (the capital) are paid back, usually monthly, over the lifetime of the mortgage. Borrowers can be reassured that at the end of the mortgage term, say 25 years, the mortgage will be fully paid off.

Interest-only mortgages

An interest-only mortgage means you make two separate payments each month. The first payment is to the mortgage lender as interest on the loan. The second payment is to a savings scheme (in previous years, this was most commonly an endowment policy) which aims to grow over the period of the loan, say 25 years, into a sum which will pay off the original amount borrowed (the 'capital').

Endowment mortgages

For a long time, many people took out interest-only mortgages that were linked to endowment policies, known as endowment mortgages. Millions of endowment mortgages were sold in the 1980s and 1990s.

With an endowment mortgage there is no guarantee that your endowment policy will grow enough to meet the target amount at the end of the term. The endowment mortgage is therefore a riskier product for consumers than the guaranteed repayment mortgage.

Endowments are classed as 'risky' products because they are investments related to the performance of the stock market. There is the possibility that if the stock market is not growing sufficiently, the endowment may not grow enough to pay off the original loan. If the stock market does well over a long period of time, there is a possibility the endowment will pay out more than the target amount.

Currently many endowment mortgages are expected to fall short of the amount needed to pay off the mortgage.

How many people have endowment mortgages?

It is estimated that there are around ten million endowment policies linked to mortgages in operation today. This affects about eight million people. These numbers are different because some people have more than one endowment policy running to pay off their mortgage.

We also know that many more consumers than this have bought endowment policies over the years but have since 'surrendered' them (cashed them in). It is difficult to estimate how many people this affects.